Ch7

1) Which of the following trading strategies are correct? I. If you expect the British pound to appreciate in value, you should short the pound. II. If you expect interest rates to rise, you should go long on interest rate futures. III. If you expect the stock market to rise, you should go long on stock- index futures. IV. If you expect the stocks in your portfolio to temporarily decline in value, you should short stock- index futures. A) I and II only B) II and IV only C) III and IV only D) I and III only 2) Assume an investor thinks the stock market is about to undergo a sharp retreat. Under these conditions, the investor's best course of action would be to A) buy stock- index futures contracts. B) short sell stock- index futures contracts. C) use single stock futures to sit out the market. D) use a long hedge against the investor's existing positions. 3) Mr. Lecourt sells short 200,000 euros for $240,000. The exchange rate moves from $1.20 per euro to $1.25. If Mr. Lecourt covers his short at this point, he A) loses $10,000. B) gains $10,000. C) loses $12,000. D) gains $12,000. 4) To hedge a bond portfolio, an investor should use A) a foreign- currency future. B) a stock- index future. C) a certificate of deposit. D) an interest rate future. 5) Assume a portfolio manager created a short interest rate hedge for his/her portfolio. Given this hedge, the manager is A) essentially eliminating both the downside risk and the upside potential. B) eliminating the downside risk without hampering the upside potential. C) partially diminishing the downside risk without impairing the upside potential. D) eliminating the downside risk and increasing the upside potential. 6) Suppose you own a portfolio of British securities valued at $430,000. The exchange rate is currently at $1 = 0.57. A currency contract on British pounds is set at 62,500 pounds. How many contracts must you purchase to protect your portfolio from exchange rate risk? A) 1 B) 2 C) 3 D) 4 7) One of the biggest differences between a futures option and a futures contract is that A) the option limits the loss exposure to the price of the option. B) the futures contract limits the loss exposure to the price of the contract. C) an option can be traded on the secondary market, whereas a futures contract cannot. D) a futures contract can be traded on the secondary market, whereas an option cannot. 8) Some investors combine two or more different futures contracts into one investment position that offers the potential for ...
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